NDLI: Analysis of fixed-rate mortgage with intensity process: A game-theoretic framework

Content Provider	IEEE Xplore Digital Library
Author	Qian Yan-xiang
Copyright Year	2008
Description	Author affiliation: Sch. of Finance, Shanghai Univ. of Finance & Econ., Shanghai (Qian Yan-xiang)
Abstract	Based on prepayment intensity process, this paper studies the valuation of fixed-rate mortgage contracts and an (game-theoretic) equilibrium model is built. Under the assumption of the rate process of time-homogeneous Markov chain and positive linear refinancing cost, the dynamic programming problem of the mortgagor is simplified to a Markov decision chain with only three discrete state variables which is proved to have a unique solution. The equilibrium is given by a pair of the endogenous rate and the optimal refinancing strategy of the mortgagor. A simple numerical example with an iteration algorithm is finally provided to show how to compute the equilibrium. The results show that the mortgagor is usually too hasty to refinance, thus refinancing is typically a myopic behavior.
Starting Page	1325
Ending Page	1330
File Size	301225
Page Count	6
File Format	PDF
ISBN	9781424423873
DOI	10.1109/ICMSE.2008.4669079
Language	English
Publisher	Institute of Electrical and Electronics Engineers, Inc. (IEEE)
Publisher Date	2008-09-10
Publisher Place	USA
Access Restriction	Subscribed
Rights Holder	Institute of Electrical and Electronics Engineers, Inc. (IEEE)
Subject Keyword	equilibrium model Economic indicators Partial differential equations Stochastic processes Finance game theory Hazards Risk analysis Cost accounting prepayment risk Loans and mortgages mortgage Pricing Markov decision chain intensity process Contracts
Content Type	Text
Resource Type	Article

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